Champaign, Ill. — University of Illinois Urbana-Champaign law professor Robert M. Lawless is a leading consumer credit and bankruptcy expert. Lawless, the Max L. Rowe Professor of Law and co-director of the Illinois Program on Law, Behavior and Social Science, spoke with News Bureau business and law editor Phil Ciciora about the Trump administration’s abrupt shakeup of the Consumer Financial Protection Bureau.
With the Consumer Financial Protection Bureau weakened, could we see a return of the risky lending that led to the subprime mortgage crisis?
For mortgage lending, probably not. In 2010, at the same time Congress created the Consumer Financial Protection Bureau, it also enacted some safeguards against the resumption of risky subprime mortgage lending. Those safeguards have been very effective.
So even if the Trump administration is successful in gutting the CFPB, those legal provisions stay in place. These are laws on the books that the Trump administration cannot unilaterally repeal. Specifically, the Truth in Lending Act now requires your mortgage lender to determine if you have the ability to repay a mortgage. Lenders who do not follow those rules open themselves up to liability.
Think about that. We had to legislate that the lender made sure that the borrower could actually repay the loan. Banks that don’t make that determination face liability to their borrowers.
There is a presumption that the borrower has the ability to repay if the mortgage terms meet certain criteria and thereby fit the requirements as a “qualified mortgage.” The criteria are such that they get rid of a lot of the exotic, crazy things that were happening that led up to the Great Recession. The loan has to amortize, for example. In other words, the amount you owe each month has to keep going down instead of going up — which, again, sounds crazy on its face, but there were such loans. This law is why we see so many more 30-year fixed mortgages nowadays compared to the early 2000s.
Again, even if the CFPB is defanged, those provisions are still in place. It does not change the law. Banks still have an incentive to continue offering these so-called “plain vanilla” mortgages.
There’s an additional wrinkle. The law uses an interest rate benchmark published by the CFPB each month. Having the safe harbor of a plain-vanilla qualified mortgage is very valuable to the lender because it protects them from liability, which is why there are so many plain-vanilla mortgages. Without the CFPB publishing that rate, there’s no safe harbor. News reports suggest that mortgage lenders have been pushing for the CFPB to hire back enough personnel to keep publishing that rate.
What does the gutting of the agency mean to the average person?
It’s hard to say. I think people won’t notice it in their daily lives right away. It’ll just be a steady drip, drip, drip of companies trying to game the system and nickel and dime people via aggressive practices.
Over the long run, it’s going to affect people. It’ll be the frog and the boiling pot of water. It’ll be a steady ratcheting up of unfair practices, and there will be no more cops left to police the beat.
State attorneys general are still empowered to act on behalf of consumers. They have enforcement powers of their own under state law, and the Consumer Financial Protection Act allows state attorneys general to enforce its provisions. So, some of it will depend on what state you’re in. If you have a state attorney general that takes consumer protection seriously — and I think the state of Illinois certainly qualifies as one — you will be better off than someone living in a state that doesn’t.
At the same time, state attorneys general tend not to have the enforcement resources that the CFPB has. The CFPB has one mission, which is to enforce consumer financial protection laws. State attorneys general have lots of other missions as well.
If the courts will enforce the law, there will be limits on how far the Trump administration can go, because the CFPB has statutorily mandated duties. For example, the CFPB has restarted taking consumer complaints because Congress requires it. The statute also requires the CFPB to send the complaints through to companies, and the companies must respond.
The CFPB is also obligated to do what are called supervisory visits to the big consumer financial lenders. These supervisory visits are not really an audit, but they are somewhat akin to that. The idea is that the CFPB looks at businesses practices and proactively identifies problematic practices before they cause major problems. The supervisory process has produced many informal resolutions with lenders and without draconian enforcement actions. The supervisory process is accomplished through conversation and informal consultation. It has been handled well and efficiently by the CFPB. Eliminating it is the opposite of efficiency.
What will this mean for consumer bankruptcies? Is it inevitable that we’ll see a spike in filings?
I don’t think that the weakening of the CFPB is going to have a direct effect on consumer bankruptcies. The CFPB does try to make sure that the credit to which consumers have access is safe, but, as with everything, there’s always risk.
In terms of consumer bankruptcies, they’ve been ticking up for the last 18 months. They hit a historic low point during the COVID-19 pandemic but now are trending back upwards. One thing we know is that consumer bankruptcies follow the amount of debt that households have on their balance sheets, and a lot of that debt got paid down during the pandemic. But households have been putting debt back on their balance sheets afterwards, and it’s been accumulating. The more debt people have, the more bankruptcies we’ll see.
Ultimately, I think it’s going to be a slow and steady climb back to or probably close to where we left off before the pandemic struck in 2020.
Editor’s note: To contact Robert M. Lawless, call 217-244-6714; email rlawless@illinois.edu.
